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Sectoral Economic Development Strategy Sectoral Economic Development Strategy Presentation Transcript

  • Indonesia’s Sectoral Economic Development Strategy through FTA Arrangement Keywords: Sectoral targeting, FDI, FTA Prayoga Wiradisuria October 2007 Supervisor: Professor Shujiro Urata
  • RESEARCH Determining future key FTA items between Indonesia and partner Goal country through assessment of country’s priority sector and FDI spill- over effect and hurdles. Determining priority sector (re-assessment) Method FDI spill-over effect assessment Previous FTA assessment (incl. ASEAN FTAs) Interviews of key government officials and experts Data gathering Indonesia economic statistics (time series, sectoral, etc) FTA data Subject of Economic Development theories reference FDI concept and impact analysis FTA principles
  • CONTENT Brief Statistics of Indonesia Revisiting Sectoral Targeting in Indonesia FDI and Its Spill-Over Effect Impact to FTA Key Negotiation Items
  • INDONESIA A quick glance An Archipelago of ~17,000 islands 230 Million people 300+ languages Multi-ethnic, multi-religion Gained independence 60 years ago Member of OPEC, APEC, ASEAN Democratic systems Resource-rich
  • KEY ECONOMIC INDICATORS 1997 1998 1999 2000 2001 2002 2003 2004 2005E 2006E 2007E National Account Real GDP (% yoy) 4.7 -13.1 0.8 4.9 3.8 4.4 4.9 5.1 5.4 5.4 6.0 Domestic demand (% yoy) 7.5 -15.3 -1.3 4.6 4.5 4.7 3.7 7.1 5.5 6.4 6.8 Working Draft - Last Modified 2/8/2006 10:40:49 PM Real Consumption: Private (% yoy) 7.8 -6.2 4.6 1.6 3.5 3.8 3.9 4.9 3.5 4.2 4.5 Real Gross Fixed Capital Formation (% yoy) 8.6 -33.0 -18.2 16.7 6.5 4.7 1.0 15.7 10.9 10.3 12.2 GDP (USD Bils.) — nominal 213 96 140 166 164 200 239 258 275 341 370.4 GDP per capita (USD) — nominal 1,075 477 694 742 697 948 1,117 1,191 1,254 1,538 1,648 External Sector Exports (% yoy, US$) 7.3 -8.6 -0.4 27.7 -9.3 5.0 8.4 12.0 19.5 3.0 0.8 Imports (% yoy, US$) -2.9 -34.4 -12.2 39.6 -7.6 15.1 10.9 27.8 23.7 6.2 6.7 Trade balance (US$ Bils.) 11.8 21.5 24.7 28.6 25.4 23.5 24.6 21.2 28.0 26.3 23 Current account (% of GDP) -2.4 4.3 4.1 4.8 4.2 3.9 3.4 1.1 0.6 0.2 -0.4 External debt (% of GDP) 64 157 106 86 81 66 57 53 49 39 36 Printed International Reserves-IRFCL (US$ Bils) 16.6 22.7 24.4 29.4 28.0 32.0 36.3 36.3 34.7 33 31.5 Import cover (months) 4.3 8.5 9.6 8.7 9.7 10.8 11.0 8.4 6.9 5.5 4.6 Currency/US$ (period average) 2,952 9,974 7,847 8,389 10,247 9,315 8,573 8,936 9,711 9,315 9,750 Other 1M SBI Rate (% period average) 15.3 48.8 22.8 12.4 16.5 15.1 10.1 7.5 9.6 12.6 11.8 Consumer prices (% period average) 6.2 58.0 20.8 3.8 11.5 11.8 6.8 6.1 10.5 13.7 7.6 Fiscal balance (% of GDP; FY) -1.2 -1.7 -2.8 -1.2 -2.4 -0.9 -1.8 -1.2 -0.5 -1.1 -0.5 S&P's Rating - FCY BB+ CCC+ CCC+ B- CCC CCC+ B B+ B+ S&P's Rating - LCY BBB+ B- B- B B- B- B+ BB BB Source: Citigroup 4
  • ECONOMIC PROJECTION BI's Economic Prospects 2005 2006 Economic Forecasts: I. Real GDP Growth (%) 5.3 - 5.6 5.0 - 5.7 Budget Assumptions 2006 1. Consumption: 3.3 - 3.8 4.0 - 5.0 a. Private Consumption 3.4 - 3.9 3.0 - 4.0 Economic Growth (%) 6.2 Inflation rate - eop (%) 8.0 Working Draft - Last Modified 2/8/2006 10:40:49 PM b. Government Consumption 2.6 - 3.1 12.8 - 13.8 2. Investment 9.6 - 10.1 8.4 - 9.4 3M SBI rate - average (%) 9.5 3. Exports of Goods & Services 7.6 - 8.1 7.4 - 8.4 Vs. Exchange Rate - average 9,900 4. Imports of Goods & Services 10.5 - 11.0 9.1 - 10.1 Oil Price - ICP (US$/barel) 57.0 II. CPI Inflation Rate - eop (% YoY) 18 7.0 - 9.0 Oil Production/Lifting (MBCD) 1,050 Assumptions: I. External Conditions: 1. World Oil Price (USD/barrel) 53 57 2. World Output Growth (%) 4.3 4.3 3. World Trade Volume Growth (%) 7 7.4 Medium Term Targets, 2005 - 2008 2004 2005 2006 2007 2008 Printed 4. World Interest Rate (%) 3.6 4.5 Economic Growth (%) 5.1 5.5 6.1 6.7 7.2 5. US tight money policy ends at 2Q06, thus stable IDR/USD Quality of Growth: expected in 2006 1. Open Unemployment: II. Internal Conditions: a. Million of Persons 10.3 10.2 9.6 8.8 7.5 1. Wages/Salary increase and bank credit growth of around 15% - b. % of Labor Force 9.9 9.6 8.9 8 6.7 2. Manpower 20% in 2006 can partly offset the declining purchasing power due to a. Labor Force (million of persons) 104 106 108 110 112.1 high inflation Additional (million of persons) 1.3 2 2 2 2.1 2. Tight "bias" monetary policy to help curb inflation b. Job Opportunity (million of persons) 93.7 95.7 98.3 101.2 104.6 3. Faster disbursement of government spending in 2006 Job Creation (million of persons) 0.9 2 2.6 2.9 3.3 4. Better investment climate, incl. Investment Law, Tax reforms, Labor Law, etc. Source: Bank Indonesia, 16 Dec 2005, APBN 2006 5
  • INDUSTRY SECTORS CONTRIBUTION TO GDP 1Q05 2Q05 3Q05 YTD-05 Share 1Q05 2Q05 3Q05 YTD-05 Share 1. Agriculture 2.5% 1.1% 1.6% 1.7% 15.3% 4. Utilities 5.8% 8.9% 9.8% 8.8% 0.7% a. Farm Food Crops 1.3% -0.6% 0.3% 0.4% 7.9% 5. Constructions 7.3% 8.1% 6.3% 7.2% 5.9% Working Draft - Last Modified 2/8/2006 10:40:49 PM b. Others 4.1% 2.8% 2.9% 3.2% 7.5% 6. Trade, Hotel & Rest. 10.0% 10.0% 7.9% 9.2% 16.7% 2. Mining and Quarrying 0.7% -0.8% -2.3% -0.8% 9.0% a. Wholesale & Retail 10.6% 11.1% 8.4% 10.0% 13.7% a. Oil & Gas -6.6% -4.7% -6.4% -5.9% 5.3% b. Hotel 11.3% 1.8% 3.1% 5.3% 0.7% b. Non Oil & Gas 16.5% 4.7% 3.3% 7.7% 2.8% c. Restaurant 5.9% 5.9% 6.0% 6.0% 2.2% c. Quarrying 7.3% 8.1% 6.3% 7.2% 0.9% 7. Transport & Comm. 13.2% 13.9% 12.9% 13.3% 6.1% 3. Manufacturing Industries 6.5% 5.5% 5.6% 5.9% 28.1% a. Transport 10.6% 7.9% 5.1% 7.8% 3.8% a. Oil & Gas -3.0% -2.0% -0.1% -1.7% 2.8% * Railways -4.9% -5.5% -4.9% -5.1% 0.0% b. Non Oil & Gas 7.7% 6.4% 6.3% 6.8% 25.3% * Road 4.8% 5.3% 4.9% 5.0% 1.6% * Food, Bev. & Tobacco 4.7% 3.5% 2.9% 3.7% 7.0% * Air Transport 20.4% 12.2% 7.2% 12.8% 0.6% * Textile, Leath & Footw -0.8% 3.1% 1.2% 1.1% 3.1% b. Communication 17.9% 25.2% 27.5% 23.6% 2.3% * Wood & Forest Prod. 0.3% -2.1% 0.5% -0.4% 1.2% 8. Finance 6.4% 9.8% 9.1% 8.4% 9.2% * Paper & Printing 3.9% 4.6% 8.7% 5.7% 1.4% a. Banks 1.4% 9.9% 10.1% 7.1% 4.1% Printed * Fertilizer, Chem.& Rubber 17.6% 9.0% 6.3% 10.7% 3.4% b. Non Bank Financial 8.9% 9.2% 7.8% 8.6% 0.7% * Cement/Non-Metal Quarry 10.1% 8.7% 2.6% 7.0% 0.9% c. Others 10.9% 10.2% 10.2% 10.6% 4.4% * Iron & Steel -8.0% -4.2% -3.5% -5.2% 0.4% 9. Services 4.9% 4.4% 5.4% 4.9% 9.0% * Transport/Machine Equip. 13.5% 11.7% 13.5% 12.9% 7.7% Real GDP 6.1% 5.8% 5.3% 5.8% 100.0% blue figures mean average growth Source: Badan Pusat Statistik green figures mean better to excellent growth red figures mean lower to dismal growth 6
  • SAVING RATIO AND INVESTMENT RATIO Saving Ratio Investment Ratio 1994-1996 2002-2004 Change 1994-1996 2002-2004 Change Working Draft - Last Modified 2/8/2006 10:40:49 PM Bangladesh 20.1 23.5 -3.4 20.7 24.0 -3.2 China 41.3 45.8 -4.5 40.5 42.6 -2.1 Hong Kong 31.6 31.6 0.0 32.8 22.3 10.6 India 22.4 23.3 -0.9 23.9 22.8 1.1 Indonesia 28.4 23.3 5.1 31.2 20.4 10.8 Malaysia 34.9 34.0 0.8 42.1 22.7 19.4 Philippines 18.8 22.5 -3.7 23.5 19.2 4.3 Printed Singapore 50.7 44.2 6.5 34.4 18.6 15.7 Korea 35.9 32.2 3.7 38.4 29.4 9.0 Taiwan 27.5 26.5 1.0 24.6 18.0 6.6 Thailand 34.3 30.5 3.8 41.4 25.3 16.1 Vietnam 18.2 31.1 -12.8 28.1 34.4 -6.3 7
  • CONTENT Brief Statistics of Indonesia Revisiting Sectoral Targeting in Indonesia FDI and Its Spill-Over Effect Impact to FTA Key Negotiation Items
  • DEFINITION AND BENEFITS OF SECTORAL TARGETING Main benefits of targeting Working Draft - Last Modified 2/8/2006 10:40:49 PM • Mobilizes and focuses public resources (public funds, Definition of sectoral administrations, political decisions) on a limited number of targeting projects or sectors to gain a favorable position relative to competitor countries (concentration vs. dispersion) Identification by the state or • Identifies the fields of action that offer the most region of activity sectors productivity for public investment to prioritize state for priority resource intervention (economic vs. political approach) allocation with the objective • Enables more effective, transparent public communication Printed of accelerating economic with international lenders, investors, and local economic actors development • Narrows the scope of state action so that sectoral strategies can be defined in greater depth 9
  • EXAMPLES OF PROACTIVE SECTORAL-TARGETING STRATEGIES SUCCESSFULLY IMPLEMENTED BY EMERGING NATIONS Key comparative advantages IT/business India • Low-cost, qualified, English-speaking workforce process • Availability of world-class IT infrastructure (e.g., Working Draft - Last Modified 2/8/2006 10:40:49 PM outsourcing (BPO) special IT parks) Dubai • Geographic location Logistics/light • Quality of port infrastructure manufacturing • Free zone for light manufacturing (Jebel Ali) Morocco • Climate/environment/culture Printed Tourism • Proximity to Europe • Hotel infrastructure Tunisia • Availability of raw materials (olives) Olive oil • Availability of production, promotion, and marketing 10
  • ILLUSTRATION: NATIONAL ECONOMIC STRUCTURE ANALYSIS GDP, jobs, and exports (including informal sector) Industrial sector ratios Jobs per mn Exports/ revenue revenue (%) 100% = 419bn 9.6mn jobs 136bn 39 39 Tertiary 14 19 Working Draft - Last Modified 2/8/2006 10:40:49 PM Tertiary sector 54 sector 12 Industrial 4 33 Industrial secondary 9 16 secondary sector 52 Other secondary 12 Other 40 16 11 secondary Primary sector 18 4 5 Primary GDP Employment Exports 52 8 sector Printed • The industrial sector occupies a position of • The industrial sector makes a relatively limited medium importance in the local economy, with 16% contribution to job creation of GDP and only 12% of jobs • A significant share of production is destined for export • However, the industrial sector is the country’s leading source of exports, accounting for more than 50% of all exports 11
  • ILLUSTRATION: COMPARATIVE ANALYSIS WITH OTHER COUNTRIES Industrial GDP in $ bn Country 1 High 44 Working Draft - Last Modified 2/8/2006 10:40:49 PM Industrial GDP Country 7 31 ($ bn) 30 17 Country 2 Country 3 Country 11 Low under study Printed 6 Country 4 2 Country 6 1 Country 5 Low High Relative weight of industrial sector (industrial GDP/total GDP) 12
  • ILLUSTRATION: STATIC ANALYSIS OF CONTRIBUTION DISGUISED EXAMPLE MADE BY DIFFERENT BRANCHES Large sector 100% = 52.1bn 467,000 jobs 70.8bn Electronics 1% 2% 3% Machinery and equipment 2% 2% 1% 0% 2% 2% Furniture and other industries 2% 2% 1% 1% 4% Working Draft - Last Modified 2/8/2006 10:40:49 PM 3% Electrical appliances and machines 2% 5% 14% Paper and board 7% Automotive 2% 12% 5% 13% Chemicals 19% • Textile and agri-food industries play a Building materials structuring role in 40% the national Printed economy 20% 47% Textiles and leather • The automotive sector is relatively significant to exports 34% 32% Agri-food* 21% GDP Employment Exports 13
  • ILLUSTRATION: DYNAMIC ANALYSIS OF GROWTH IN MAIN BRANCHES Average annual growth rate (AAGR) of GDP GDP GDP growth %, last 5 years 17.3 1.3 2.7 Agri-food* Working Draft - Last Modified 2/8/2006 10:40:49 PM Textiles and leather 10.3 0.3 0.6 Building materials 9.3 1.6 4.8 • Relatively low GDP growth in absolute terms Chemicals 6.6 1.8 8.3 ** • Average annual growth rate of GDP is above 5% Automotive 2.5 0.8 9.6 in only three sectors: – Automotive and Printed 2.3 0.03 0.4 electronics Paper and board (for export) – Chemicals Electrical appliances (for domestic market) 1.3 0.05 0.9 and machines Furniture and other 0.9 -0.1 -2.6 industries Machinery and 0.9 0.1 4.1 equipment Electronics 0.7 0.1 6.0 14
  • CONTENT Brief Statistics of Indonesia Revisiting Sectoral Targeting in Indonesia FDI and Its Spill-Over Effect Impact to FTA Key Negotiation Items
  • FDI IS ASSUMED TO BRING POSITIVE TO INDONESIA ECONOMY THROUGH INCREASED CAPITAL STOCK, EMPLOYMENT, AND PRODUCTIVITY Impact generated Investments through FDI Capital Depreciation Working Draft - Last Modified 2/8/2006 10:40:49 PM stock • FDI can have important positive Existing stock effects on a country’s economic development* Job creation • FDI impacts GDP through 3 key GDP Employment Job destruction levers Printed – Increasing capital stock Existing employment – Employment creation – Inward transfer of skills and Technology technology* leading to increased productivity Skills/Knowledge Productivity throughout the economy Scale effects Geography, culture , etc. 16
  • SPILLOVER-EFFECT PROVIDES A GOOD ESTIMATE OF THE IMPACT AN FDI HAS ON A LOCAL ECONOMY Case example: Intel’s $300mn* investment in Costa Rica in 1997 created spillover in GDP growth, trade balance, social conditions, and knowledge/productivity sector Before Intel investment After Intel investment Working Draft - Last Modified 2/8/2006 10:40:49 PM Pre-1997 Post-1998 4.6 % (1990-1996) • 7%-8% (1997-1999; highest in Latin GDP growth America) • Five points of 8% attributed to Intel (close to 60% GDP growth attributed to Intel) • $500mn deficit • $600mn surplus • Trade concentrated in Latin America • Trade diversified to European and Printed Balance of trade and U.S. Asian countries (export to Asian countries almost tripled) Knowledge/ • Not much interaction with • Exchange of curriculum, faculty, and productivity cutting-edge research students through “Intel associate” programs • Rush toward technical education Sources: Intel; Center for International Development, Harvard University 17
  • IN GENERAL, SPILLOVER CAN BE CLASSIFIED AS QUANTIFIABLE OR NONQUANTIFIABLE Quantifiable spillover effects Nonquantifiable spillover effects Macroeconomic-related Health-related Explanation Examples Examples Explanation Working Draft - Last Modified 2/8/2006 10:40:49 PM Spillover from Additional GDP created Emergence of a large Improvement in Capital Social led multiplier effects of because of investment software professional quality of life annual opex spent middle class in on local economy Bangalore Increase in Know- Indirect employment Chip-testing knowledge base ledge Additional indirect knowledge in Labor led created by main and capabilities employment generated Singapore/Malaysia investment Printed because of investment Dresden in former Change in Brand Effect on balance Foreign East Germany country’s image image of trade and Additional exports trade as a high-tech foreign because of investment related knowledge hub reserves Increase in government Quantum Improvement in Fiscal Increase in Infrastru- tax revenue because of infrastructure local physical related government cture investment/new improvement in and business revenue employment southern China infrastructure Source: McKinsey study 18
  • SOME SPILL-OVER EFFECTS QUANTIFICATION METHODS Description Source or examples • Created by U.S. Department of www.bea.gov/bea/dn2/home/ Commerce benchmark.htm RIMS Working Draft - Last Modified 2/8/2006 10:40:49 PM • More than 300 industry aggregates and I/O tables available for more than 300 counties in 50 states • Created by U.S. Forest Services and www.implan.com University of Minnesota IMPLAN • Now maintained by Minnesota-based IMPLAN group Printed • Considered most accurate I/O table Department of Statistics, government • Created by the local statistical - Singapore of Others* organizations in each country • Mostly country-level information * Most countries have I/O tables, which are published either by the central bank or the central statistical body 19
  • FDI FLOW INTO THE COUNTRY, HOWEVER, IS FACED WITH VARIOUS HURDLES PREVENTING INDONESIA FROM GETTING MAXIMUM SPILL- OVER EFFECT BENEFIT Typical hurdles Examples (Hypothetical) • Land • Energy Working Draft - Last Modified 2/8/2006 10:40:49 PM Scarce resources • Water • Corruption networks • Political issues Hidden agendas • Unwillingness to give up responsibility and control Printed • Long lead times between steps of investment process Slow and inflexible processes • Administrative and bureaucratic hurdles • Mentality issues • Missing industry/ Lack of industry functional expertise and functional • Focus on new sectors for knowledge the economy 20
  • CONTENT Brief Statistics of Indonesia Revisiting Sectoral Targeting in Indonesia FDI and Its Spill-Over Effect Impact to FTA Key Negotiation Items
  • FTA What negotiation items need to be incorporated in FTA between Indonesia and partner country in a respective sector 1. To help overcoming the hurdles to FDI from the 2. To multiply the spill-over effect of the FDIs
  • FTA NEGOTIATIONS SHOULD BE LEVERAGED TO INCLUDE ITEMS THAT WILL HELP IN OVERCOMING VARIOUS HURDLES TO GENERATE FDI FLOWS INTO THE COUNTRY Typical hurdles Examples FTA items (hypothesis) • Land • Transparent policy regarding pricing, allocation • Energy and usage of key resources Working Draft - Last Modified 2/8/2006 10:40:49 PM Scarce resources • Water • Establish dedicated unit (e.g., land authority) that closely works together with the Investment Agency to free up and allocate resources for new investors • Corruption networks • Agree on the cultivation of ‘transparency of the system’ • Political issues as guiding theme Hidden agendas • Unwillingness to give up • Establish ‘round table’ culture to involve all relevant responsibility and control stakeholders when problems and bottlenecks occur Printed • Long lead times between • Education of Local Investment Agency staff towards a steps of investment process hands-on, consequent follow-up process with Slow and inflexible processes • Administrative and stakeholders bureaucratic hurdles • Agree on the removal hurdles and inefficiencies • Mentality issues (‘From red tape to red carpet’) • Missing industry/ • Regular training and coaching sessions to build up Lack of industry functional expertise necessary skill set provided by the investor and functional • Focus on new sectors for • Transparent recruitment of experts in key areas knowledge the economy 23
  • IN SUMMARY Working Draft - Last Modified 2/8/2006 10:40:49 PM Indonesian Industries sectoral assessment Non- Key Sectors Targeted Key Sectors 1. _____ 1. _____ 2. _____ 2. _____ 3. _____ 3. _____ Approach Support Printed FDI Targets: 1. Tangible FDI 2. Intangible Hurdles: 1. Political agenda 2. Lack of knowledge Support Key items to be negotiated FTA 1. 2. 3. 24